Marsh & McLennan in the US, parent of beleaguered global broker Marsh, has acted swiftly and effectively to counter the contingent commissions crisis. In an operation that will probably be used in future PR tutorials for major companies, the giant company has axed its CEO, announced a wide-ranging internal review, apologised to shareholders, fired one employee and suspended four others implicated in the scandal and promised to provide “appropriate restitution” to clients disadvantaged by its fee-rigging practices.

Its rapid action appears to have worked. New York Attorney-General Eliot Spitzer has indicated that he won’t pursuit a criminal lawsuit against Marsh, although the individuals implicated will probably not be so lucky.

New Marsh & McLennan Chairman and CEO Michael Cherkasky – a former colleague of Mr Spitzer’s – has moved quickly after his predecessor, Jeffrey Greenberg, fell on his sword and quit. Mr Cherkasky said late last week that the bid-rigging has occurred in only a limited number of cases. An internal review is continuing.

Four employees have been suspended and one fired. Four of them had already been named by Mr Spitzer, who alleges they worked with managers in AIG and Ace to supply fake quotes.

Mr Cherkasky is treading a relatively fine line on the matter, maintaining that the contingent commissions harmed no clients, while bid-rigging did.

That doesn’t mean contingent commissions will continue. He told a conference call with US journalists last week that Marsh has now “permanently eliminated the practice of receiving any form of contingent compensation from insurers”. The use of the word “compensation” was a nice touch, making the point that the commissions were allegedly paid for services to be performed.    

He said Marsh will continue to centralise its global broking to maintain its leverage with insurers. “The model works.”

Shares in Marsh & McLennan are slowly recovering after sliding 45%. The share price is being tipped to take a while to recover, especially as contingent commissions were worth an admitted $US845 million to the group’s bottom line last year – 7% of its total earnings.

The fees earned $420 million in the first half of this year.

In other developments…

• Most major brokers have now sworn off contingent commissions, including Aon, Willis, Arthur J Gallagher and JLT. Most have also announced internal reviews. The big brokerages have emphasised that – of course – there is nothing illegal in contingent commissions. They have also indicated their willingness to co-operate with Mr Spitzer’s gradually widening probe.

• A manager at Ace and two AIG executives have already pleaded guilty to felony charges related to the Spitzer investigation of Marsh, and their companies are still being investigated for their payments to leading brokers. Other companies being investigated include St Paul Travelers, subsidiaries of Munich Re and Zurich, ING and Dutch company Aegon.

• The Spitzer inquiry is now expanding to include other branches of the insurance sector. Health insurers Aetna and Cigna have been subpoenaed, as have life insurers Metlife, Hartford and UnumProvident. 

• State jurisdictions are also finding it difficult not to get involved. California, Connecticut and Pennsylvania have already announced their own investigations. State regulators are also planning new laws banning any form of secret commissions.

• The Financial Services Authority (FSA) in the UK and Lloyd’s are taking a different line, saying the real answer to the problem of contingent commissions is transparency. CEO Nick Prettejohn says Lloyd’s will support moves to force UK brokers to disclose all commissions and fees to clients.  “Lloyd’s strongly supports the maximum possible disclosure and transparency for all commission arrangements,” he said.

• The FSA takes over supervision of brokers on January 1, and industry sources say they believe the new regulator will introduce across-the-board disclosure requirements.

• The plunge in Marsh’s share price exposes it to the possibility of being taken over, according to New York analysts. Industry insiders say such a move could destabilise the broker market. The upside could be that smaller brokers would come back into favour with larger clients.

• Marsh isn’t in the clear yet, and nor are other major brokers which have admitted accepting the contingent commissions from insurers. A spate of lawsuits from clients which feel they have been disadvantaged by the practice is regarded as inevitable in litigation-happy corporate America.